Precious metals: A liquid market?

Liquidity refers to the ease with which a commodity can be converted into cash in the marketplace and is created by the existence of a large number of buyers and sellers.

The 19th century Gold Standards and the Bretton Woods system that followed World War II, fixed the price of gold by agreement, therefore guaranteeing its liquidity. Starting in 1931 world currencies have become ‘fiat’ currencies and the last to abandon a link to gold was the Swiss Franc in 2000.

The Basel Accord established the system of floating exchange rates in 1973 and since then the US dollar has served as the de facto world reserve currency; the monetary unit in which oil, gold, and other commodities are priced.

For the past several years now, the dollar has depreciated against the euro and other currencies, to the point that those countries holding most of their foreign reserves in US currency are urgently seeking ways to curb the inevitable appreciation of their own. Meanwhile, international investors disillusioned with weak US markets have transferred funds into several emerging economies – boosting their currencies even further.

Asian countries including China, India, Thailand and Bangladesh are stocking up on gold amid concerns of an escalating global currency war. South Korea is one of the smallest holders of gold among large economies and holds 63% of its reserves in dollars. Even a small realignment of South Korea’s reserves would have a powerfully bullish effect on the gold market.

The government has reversed its position on private metal ownership and now encourages citizens to put at least 5% of their savings into gold and silver, while the export of raw gold is strictly prohibited. Chinese mines produced 300 tonnes in 2009, making them the world’s largest gold mining nation.

Historically precious metals were chosen as a suitable material for making money because their properties were well suited to the functions of money: to store value and to provide a convenient medium of exchange. There is no denying gold’s store-of-value relevance throughout the history of the world, it has been and will always be the ultimate form of currency.

The advance of electronic commerce has fundamentally changed the second function of money, but the durability, desirability and recyclability of precious metals still underpins the surging demand for gold, silver, platinum and its sisters.

Investment demand for gold and silverPrecious metals have long been recognised for their tendency to appreciate when other financial instruments, like stocks and bonds are declining.

Precious metals, like most commodities, are traded at market prices that are driven by supply and demand as well as by speculation. However, unlike most other commodities their price is influenced more by hoarding and disposal, than by consumption.

The existence of a huge inventory of stored gold, compared to the volume of annual production, means that changes in sentiment affect the price of gold far more than the level of annual production. Most of the 165,000 tonnes of gold ever mined still exists in accessible form, such as bullion and mass-produced jewellery, with little added value over its fine weight; and is thus potentially available to gold markets for the right price.

According to the World Gold Council, annual mine production of gold has followed a declining trend since the peak of about 2,600 tonnes in 2001 to just 2,350 tonnes last year.

Typically, about 2,000 tonnes goes into jewellery or industrial/dental production, around 700 tonnes to retail investors and a further 500 tonnes to exchange traded gold funds. The resulting annual deficit of about 1,500 tonnes is supplied from central bank sales and the recycling of scrap jewellery.

According to GFMS, a precious metals consultancy, the gold market has changed shape since 1988 because with emerging market countries buying and central banks in Europe halting their sales of bullion, central banks are set to become net buyers of gold this year for the first time in years.

A global surge in precious metal purchasing has seen investors from many countries competing to buy gold and silver in both the physical market and through exchange traded funds. Despite the severity of the global economic recession, precious metal prices are at record high levels.

The platinum group metalsUnlike gold and silver, which were first isolated in a comparatively pure state by simple fire refining, the platinum metals require complex aqueous chemical processing for their isolation and identification.

As these techniques were not available until the turn of the 19th century, the popular use of these metals lagged behind silver and gold by thousands of years.

In addition, the high melting points of these metals limited their applications until methods were devised for consolidating and working platinum into useful forms.

The fashioning of platinum into fine jewellery began circa 1900 and remains important; accounting for around 20% of all platinum production, with excellent demand in newer markets like China, Japan and India, but has now been eclipsed by industrial uses. Platinum is both an essential and precious metal and is part of the six member family of platinum group metals (PGMs), which also includes palladium, rhodium, iridium, osmium, and ruthenium.

These metals are known for their purity, high melting points and resistance to corrosion at high temperatures. The use of palladium and rhodium in jewellery manufacturing is also growing steadily.

While all PGM’s are rare, they are uniquely durable and can be used extremely efficiently – meaning that a very little goes a very long way. When recycled, over 96% of PGMs are recovered through highly-efficient recycling techniques giving them a uniquely long lifecycle and contributing significantly to the protection of the environment by reducing any negative impact which is often linked with metal waste disposal.

Investment demand for PGM’SPlatinum’s unique fundamentals offer investors both the ability to hedge against uncertainty and the potential for profit.

Buying platinum is an easy way to invest in worldwide economic growth because the metal is essential to the economies of many industrialised nations. Investment demand by individuals around the world is rising and in such conditions, platinum normally develops a significant price premium over gold, as it is considerably rarer and indispensible for many industrial applications.

Pure platinum legal tender bullion coins provide a liquid, convenient and reliable way to invest and these include: Australian Koala, Canadian Maple Leaf, Isle of Man Noble and Chinese Panda. All coins are 99.95% pure and are available in one-ounce and fractional sizes. Various producers also offer investment-grade bars in 10-ounce and smaller sizes.

Platinum’s supply/demand fundamentals are tight even during periods of relatively normal mining production. In fact, were platinum mining to cease today, above ground reserves would last less than two years compared with gold reserves that equate to the total consumption expected in a quarter of a century.

In recent years the market demand for platinum could not be supplied without the sale of inventory from Russia’s shrinking above-ground reserves.

A large strategic stockpile of ores containing palladium was accumulated in Russia during the soviet era and irregular supply from this source has caused massive price fluctuations.

Industrial applications underpin demandPlatinum use per unit of world economic output has risen rapidly in the past decade, due to growing industrial consumption of precious metals in the manufacture of a wide variety of items ranging from automotive components to electronic devices.

The diversified demand base driven by drivers like energy conservation, environmental protection and lifestyle enhancement is boosted by consumer sales in countries that are experiencing rapid growth in disposable income. Industrial demand for platinum is relatively inelastic because the consumption per unit produced is usually tiny.

Automotive catalytic converter applications are already the largest current users of PGMs and emission control legislation is spreading quickly in Asia and Latin America; Hong Kong, Malaysia, Singapore, Taiwan, Thailand, Brazil and Chile have all passed legislation enforcing domestic catalytic converter use.

Driven by rapidly growing auto sales in these countries it is estimated that before the end of the next decade, PGM consumption for catalytic converters in emerging-market economies will surpass the total now consumed in North America, Japan and Europe.

Platinum and palladium are strongly tied to the hydrogen economy through their application as catalysts. Palladium has the unique property of storing substantial quantities of hydrogen within the lattice structure of its atoms in the solid state. This offers a possible safe but extremely expensive storage mechanism for hydrogen in the development of fuel cell-powered vehicles.

Palladium electrodes have been used in some cold fusion experiments, under the hypothesis that the hydrogen could be ‘squeezed’ between the palladium atoms to help them fuse at lower temperatures than would otherwise be required. No cold fusion experiments have achieved conclusive positive results, however, and the theoretical ability of palladium to accomplish this is in dispute.

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